©2007 Pearl Meyer & Partners
Total Exposure in Executive Compensation
Melissa L. Means, Vice PresidentPearl Meyer & Partners
132 Turnpike Road, Suite 300Southborough, MA 01772
(508) 630-1487
2©2007 Pearl Meyer & Partners
Agenda
The State of Executive Compensation
Executive Compensation Tools
New Executive Compensation Tools
Case Studies
Conclusion
3©2007 Pearl Meyer & Partners
The State of Executive Compensation
4©2007 Pearl Meyer & Partners
The State of Executive Compensation
Interested parties
Recent issues in the Spotlight
Changing Landscape
Topics of Interest
5©2007 Pearl Meyer & Partners
Interested Parties
Regulatory groups
Institutional shareholders
Shareholder activist groups
General public (shareholders)
Media
6©2007 Pearl Meyer & Partners
Recent Issues in the Spotlight
Former Tyco CEO Dennis Kozlowski“The Tyco Tryst”
Former NYSE CEO Dick Grasso
“The Grasso Fiasco”
Former Enron CEO Jeffrey Skilling
“The Enron End Run”
Former Disney President
Michael Ovitz“The Disney Disaster”
Former GE CEOJack Welch
“The Welch Whoops”
Former Home Depot CEO
Robert Nardelli“The Nardelli Two-
Step”
7©2007 Pearl Meyer & Partners
Changing Landscape
Stock option expensing (SFAS 123R)• No longer a footnote expense• Shift in LTI instruments used
Greater institutional shareholder oversight• Manage equity grant practices• Push for pay for performance• Independent compensation consultants
Emerging good governance practices• Performance metrics• Ownership guidelines• Dynamic pay models
Disclosure• Expanded disclosure
8©2007 Pearl Meyer & Partners
Topics of Interest
Supplemental retirement plans (SERP)
Supplemental benefits and perquisites
Severance arrangements - employment & change in control agreements
Tax gross-ups
Pay for performance
9©2007 Pearl Meyer & Partners
Executive Compensation Tools
10©2007 Pearl Meyer & Partners
Primary Executive Compensation Assessment Tools
Competitive analysis
• Compares compensation to competitive data (survey and proxy data)
• Provides comparison of target compensation
Tally sheets (or some form of)
• Tally up total direct compensation (TDC) typically at target
• Provides payout information of various programs:
» Retirement plans
» Deferred comp plan
» Severance arrangements
11©2007 Pearl Meyer & Partners
Challenges with Current Tools
Does not provide a complete picture of an executive compensation package
• Provides “static”, point-in-time snapshot of the amount of compensation to be delivered typically at target
• May encourage “competitive compensation” programs not necessarily performance-based compensation
• Not focused on what an executive could earn
12©2007 Pearl Meyer & Partners
New Executive Compensation Tools
Economic Impact Analysis (EIA)
Incremental Pay & Performance Alignment Analysis
13©2007 Pearl Meyer & Partners
New Executive Compensation Tools
Economic Impact Analysis (EIA)
5%20%
35%50%
65%80%
95%
5%
20%
35%50%
65%80%
95%
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
Company Performance
Stock Performance
Total Potential TDC
$6,000,000-$7,000,000
$5,000,000-$6,000,000
$4,000,000-$5,000,000
$3,000,000-$4,000,000
$2,000,000-$3,000,000
$1,000,000-$2,000,000
$0-$1,000,000
14©2007 Pearl Meyer & Partners
EIA Approach
Illustrates the compensation opportunity for each component and in total over a period of time
• Dynamic, not static assessment
Shows the relationship between pay and performance in terms of company financial and stock price performance
Simulates potential results of a compensation program
Serves as an alternative way of reviewing executive compensation packages
15©2007 Pearl Meyer & Partners
EIA Graphics
5% 15% 25
% 35% 45
% 55% 65
% 75% 85
% 95%
5%
20%
35%
50%
65%
80%95%
$0
$800,000
$1,600,000
$2,400,000
$3,200,000
$4,000,000
Company Performance
Stock Performance
Stock Options
$3,200,000-$4,000,000
$2,400,000-$3,200,000
$1,600,000-$2,400,000
$800,000-$1,600,000
$0-$800,000
5%
20%35%
50%65%
80%95%
5%
20%
35%
50%
65%
80%
95%
$0
$400,000
$800,000
Company Performance
Stock Performance
Base Salary
$400,000-$800,000
$0-$400,000
5%20%
35%50%
65%80%
95%
5%
25%
45%
65%
85%
$0
$300,000
$600,000
$900,000
$1,200,000
$1,500,000
Company Performance
Stock Performance
Total Cash (Base plus Annual Incentive)
$1,200,000-$1,500,000
$900,000-$1,200,000
$600,000-$900,000
$300,000-$600,000
$0-$300,000
5%20%
35%50%
65%80%
95%
5%
20%
35%
50%
65%
80%
95%
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Company Performance
Stock Performance
Mid-Term Incentive
$1,000,000-$1,200,000
$800,000-$1,000,000
$600,000-$800,000
$400,000-$600,000
$200,000-$400,000
$0-$200,000
16©2007 Pearl Meyer & Partners
5%20%
35%50%
65%80%
95%
5%
25%
45%
65%
85%
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
Company Performance
Stock Performance
Total Potential TDC
$6,000,000-$7,000,000
$5,000,000-$6,000,000
$4,000,000-$5,000,000
$3,000,000-$4,000,000
$2,000,000-$3,000,000
$1,000,000-$2,000,000
$0-$1,000,000
EIA Graphics and Charts
10% 20% 30% 40% 50% 60% 70% 80% 90%
10% $459,411 $528,058 $608,470 $713,499 $814,640 $910,975 $1,085,831 $1,414,389 $1,735,496
20% $1,030,427 $1,099,074 $1,184,533 $1,299,806 $1,411,006 $1,516,616 $1,701,778 $2,042,764 $2,380,187
30% $1,442,169 $1,510,816 $1,599,915 $1,722,574 $1,841,028 $1,953,326 $2,145,920 $2,495,867 $2,845,055
40% $1,793,988 $1,862,635 $1,954,844 $2,083,814 $2,208,466 $2,326,478 $2,525,422 $2,883,027 $3,242,267
50% $2,122,825 $2,191,472 $2,286,587 $2,421,456 $2,551,901 $2,675,254 $2,880,134 $3,244,896 $3,613,532
60% $2,451,661 $2,520,308 $2,618,330 $2,759,098 $2,895,336 $3,024,031 $3,234,846 $3,606,765 $3,984,796
70% $2,803,480 $2,872,127 $2,973,259 $3,120,338 $3,262,774 $3,397,183 $3,614,349 $3,993,924 $4,382,009
80% $3,215,223 $3,283,870 $3,388,641 $3,543,106 $3,692,796 $3,833,893 $4,058,491 $4,447,027 $4,846,876
90% $3,786,238 $3,854,885 $3,964,704 $4,129,413 $4,289,162 $4,439,534 $4,674,438 $5,075,402 $5,491,567
Sto
ck P
erfo
rman
ce
Company PerformancePercentiles
17©2007 Pearl Meyer & Partners
Helps Assess
Whether a program has the appropriate performance-orientation
If there is to much focus on company vs. stock price performance or vice-versa
If incentive opportunities are appropriately aligned (payouts vs. performance achievement)
If the current compensation mix is appropriate
If the program is to heavily weighted towards time-based awards
If incentive programs, as designed, support the business strategy and its corresponding time horizon
18©2007 Pearl Meyer & Partners
Potential Outcomes
Redesign of various compensation programs including changes to:
• Amounts paid to executives
• Mix of instruments in the program
• Performance metrics and goal-setting
• Incentive / payout opportunities
• The compensation strategy/philosophy
19©2007 Pearl Meyer & Partners
10% 20% 30% 40% 50% 60% 70% 80% 90%
10% $4,084,089 $4,375,795 $4,586,193 $4,765,970 $4,934,003 $5,186,054 $5,455,719 $5,771,316 $6,208,875
20% $6,611,269 $6,902,975 $7,113,373 $7,293,150 $7,461,184 $7,713,234 $7,982,900 $8,298,497 $8,736,056
30% $8,433,544 $8,725,250 $8,935,648 $9,115,425 $9,283,459 $9,535,509 $9,805,175 $10,120,772 $10,558,331
40% $9,990,611 $10,282,317 $10,492,714 $10,672,492 $10,840,525 $11,092,575 $11,362,241 $11,677,838 $12,115,397
50% $11,445,963 $11,737,669 $11,948,067 $12,127,845 $12,295,878 $12,547,928 $12,817,594 $13,133,191 $13,570,750
60% $12,901,316 $13,193,022 $13,403,420 $13,583,197 $13,751,231 $14,003,281 $14,272,947 $14,588,544 $15,026,103
70% $14,458,383 $14,750,089 $14,960,487 $15,140,264 $15,308,297 $15,560,348 $15,830,014 $16,145,610 $16,583,169
80% $16,280,658 $16,572,364 $16,782,762 $16,962,539 $17,130,572 $17,382,623 $17,652,288 $17,967,885 $18,405,444
90% $18,807,838 $19,099,544 $19,309,942 $19,489,719 $19,657,753 $19,909,803 $20,179,469 $20,495,066 $20,932,625
Company Performance
Sto
ck P
erfo
rman
ce
Percentiles
Key Discussion Points
1.) Is this to much compensation for a CEO performing between the 10th - 20th percentile for company and stock price performance? 2.) Is this an appropriate amount of
compensation for a CEO performing at the 50th percentile for company and stock price performance?
3.) Is this an appropriate amount of compensation for a CEO performing between the 80th - 90th percentile for company and stock price performance?
4.) Is an incremental change in potential TDC of 9.7% (btw the 30th and 70th percentile for company performance only) enough incentive to drive executive behaviors on company performance?
5.) Is enough of the TDC package driven by company performance?
6.) Is an incremental change in potential TDC of 67% (btw the 30th and 70th percentile for stock price performance only) an appropriate amount of incentive to drive executive behaviors?
7.) Is an appropriate amount of the TDC package driven by stock price performance?
8.) Is the mix between company and stock price performance appropriate?
9.) Does this compensation program have a true pay-for-performance orientation?
10.) What behaviors does this type of compensation program drive?
20©2007 Pearl Meyer & Partners
Assumptions
Used to forecast potential performance outcomes for the compensation program (mean and standard deviations)
• Are very important and can substantially impact outcomes
Typically analyze the following:
• Look Back – historical performance of the firm
• Look Around
» Historical performance of a peer group of firms
» Historical performance of a specific industry
» Historical performance of an Index
• Look Forward – Value Line’s forecasted performance
• Expected Value –annualized expected return using the Black-Scholes model
• Management Estimates
Each component is evaluated using an appropriate time period
21©2007 Pearl Meyer & Partners
New Executive Compensation Tools
Incremental Pay & Performance Alignment Analysis
CEO Total Potential TDC vs. Incremental Market Value over 7 years
$17.9M
$38.4M
$3.2M
$0.8B
$1.5B
$0.2B-$5,000,000
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
$45,000,000
10thP'tile
20thP'tile
30thP'tile
40thP'tile
50thP'tile
60thP'tile
70thP'tile
80thP'tile
90thP'tile
Co
mp
ensa
tio
n V
alu
e
($200,000,000)
$80,000,000
$360,000,000
$640,000,000
$920,000,000
$1,200,000,000
$1,480,000,000
$1,760,000,000
$2,040,000,000
$2,320,000,000
$2,600,000,000
Incr
emen
tal M
arke
t V
alu
e
Compensation Incremental Market Value
22©2007 Pearl Meyer & Partners
Purpose
Compares total potential total direct compensation (TDC) to the incremental market value created for shareholders
• Reflects a reasonably aligned pay and performance orientation
CEO Total Potential TDC vs. Incremental Market Value over 7 years
$17.9M
$38.4M
$3.2M
$0.8B
$1.5B
$0.2B-$5,000,000
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
$45,000,000
10thP'tile
20thP'tile
30thP'tile
40thP'tile
50thP'tile
60thP'tile
70thP'tile
80thP'tile
90thP'tile
Co
mp
ensa
tio
n V
alu
e
($200,000,000)
$80,000,000
$360,000,000
$640,000,000
$920,000,000
$1,200,000,000
$1,480,000,000
$1,760,000,000
$2,040,000,000
$2,320,000,000
$2,600,000,000
Incr
emen
tal M
arke
t V
alu
e
Compensation Incremental Market Value
23©2007 Pearl Meyer & Partners
Helps Assess
The relationship of total potential payouts for executives as compared to the incremental market value delivered to shareholders
The orientation of the lines:
• Rise and run
• Inverse relationship
Amount of compensation delivered
24©2007 Pearl Meyer & Partners
Different Alignment
Reflects differently aligned pay and performance orientations
Firm X
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
10th 20th 30th 40th 50th 60th 70th 80th 90th
Com
pens
atio
n V
alue
($1,000,000,000)
$0
$1,000,000,000
$2,000,000,000
$3,000,000,000
$4,000,000,000
$5,000,000,000
$6,000,000,000
Incr
emen
tal M
arke
t Val
ue
Compensation Incremental Market Value
Firm Y
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
10th 20th 30th 40th 50th 60th 70th 80th 90th
Com
pens
atio
n V
alue
($1,000,000,000)
$0
$1,000,000,000
$2,000,000,000
$3,000,000,000
$4,000,000,000
$5,000,000,000
$6,000,000,000
Incr
emen
tal M
arke
t Val
ue
Compensation Incremental Market Value
25©2007 Pearl Meyer & Partners
Case Study #1
26©2007 Pearl Meyer & Partners
About Firm A
Information about Firm A:
• Life Sciences firm with ~ 8,000 employees
• Revenues ~$1B; Market cap ~$3B
• Historical revenue growth 5-10%
27©2007 Pearl Meyer & Partners
Compensation Program
Compensation Program for the CEO:
Compensation Firm A - CEO
Base Salary Targeted at the competitive market median
Annual Short-Term Incentive (STI)
Threshold: 0% of salary Target: 100% of salary Maximum: 250% of salary (2.5 times the target award) Metrics: Corp EPS, Corp Operating Income, Corporate Sales,
Corp ROA
Annual Long-Term Incentives (LTI)
Stock Options – time-based vesting (50% of LTI mix) Restricted Stock – time-based vesting (50% of LTI mix)
28©2007 Pearl Meyer & Partners
Assumptions
Firm A only uses financial performance for its STI plan
Threshold and maximum performance range +/-10-15% of target for STI plan
Evaluated the following to determine appropriate growth assumptions:
• Look back - One year historical TSR for 10 years
» Average return - 12%, standard deviation – 20%
• Look around - One year historical avg TSR over 20 years for Dow Jones and S&P
» Average return – 10%, standard deviation – 15%
Assumptions:
• Used the combined Index return (10%) and standard deviation (15%)
• Simulated TSR results for 3 & 7 year periods (restricted stock & options)
• Achievement on all financial performance metrics are at the same level
29©2007 Pearl Meyer & Partners
Base Salary
5% 20% 35%
50%
65%
80%
95%
5%
35%
65%
95%
$0
$500,000
$1,000,000
$1,500,000
Company Performance
Stock Performance
Base Salary
$1,000,000-$1,500,000
$500,000-$1,000,000
$0-$500,000
CEO
Salary - $800,000
Base salary is not impacted by company or stock price performance; therefore it is one-dimensional
30©2007 Pearl Meyer & Partners
Total Cash Compensation
5% 20
% 35
%
50
%
65
%
80
%
95
%
5%
35%
65%
95%
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Company Performance
Stock Performance
Total Cash (Base Salary plus STI)
$2,500,000-$3,000,000
$2,000,000-$2,500,000
$1,500,000-$2,000,000
$1,000,000-$1,500,000
$500,000-$1,000,000
$0-$500,000
CEO
Salary - $800,000
STI:
• Min – 0%
• Target STI – 100%
• Max STI – 250%
Total cash compensation is impacted by company performance only; therefore the graphic moves from left to right. Potential value ranges from $800K-$2.75M
31©2007 Pearl Meyer & Partners
Restricted Stock
5%20%
35%50%
65%80% 95%
5%
35%
65%
95%
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
Company Performance
Stock Performance
Restricted Stock
$6,000,000-$7,000,000
$5,000,000-$6,000,000
$4,000,000-$5,000,000
$3,000,000-$4,000,000
$2,000,000-$3,000,000
$1,000,000-$2,000,000
$0-$1,000,000
CEO
Salary - $800,000
STI:
• Min – 0%
• Target STI – 100%
• Max STI – 250%
Restricted Stock:
• 70,000 shares
• Vests in 3 years
Restricted stock is impacted by stock price performance only; therefore the graphic moves from right to left. Potential value ranges from $2.5M-$5.5M
32©2007 Pearl Meyer & Partners
Stock Options
5%
15%
25%
35%
45%
55%
65%
75%
85%
95%
5%20%
35%50%
65%80%
95%
$0
$3,000,000
$6,000,000
$9,000,000
$12,000,000
$15,000,000
Company Performance
Stock Performance
Stock Options
$12,000,000-$15,000,000
$9,000,000-$12,000,000
$6,000,000-$9,000,000
$3,000,000-$6,000,000
$0-$3,000,000
CEO
Salary - $800,000
STI:
• Min – 0%
• Target STI – 100%
• Max STI – 250%
Restricted Stock:
• 70,000 shares
• Vests in 3 years
• Options:
• 160,000 options
• 7 year term
Stock options are impacted by stock price performance only; therefore the graphic moves from right to left. Potential value ranges from $0-15M
33©2007 Pearl Meyer & Partners
Total Direct Compensation
CEO
Salary - $800,000
STI:
• Min – 0%
• Target STI – 100%
• Max STI – 250%
Restricted Stock:
• 70,000 shares
• Vests in 3 years
• Options:
• 160,000 options
• 7 year term
5%20%
35%50%
65%80%
95%
5%20%
35%50%
65%80%
95%
$0
$4,000,000
$8,000,000
$12,000,000
$16,000,000
$20,000,000
$24,000,000
Company Performance
Stock Performance
Total Potential TDC
$20,000,000-$24,000,000
$16,000,000-$20,000,000
$12,000,000-$16,000,000
$8,000,000-$12,000,000
$4,000,000-$8,000,000
$0-$4,000,000
Total direct compensation is impacted by both company and stock price performance. Overall, this program is more oriented towards stock price performance than company performance
34©2007 Pearl Meyer & Partners
10% 20% 30% 40% 50% 60% 70% 80% 90%
10% $3,712,460 $3,987,007 $4,185,029 $4,354,231 $4,512,380 $4,749,604 $5,003,407 $5,300,439 $5,712,259
20% $6,300,031 $6,574,578 $6,772,600 $6,941,802 $7,099,951 $7,337,175 $7,590,978 $7,888,010 $8,299,830
30% $8,165,852 $8,440,399 $8,638,420 $8,807,622 $8,965,771 $9,202,995 $9,456,798 $9,753,831 $10,165,651
40% $9,760,127 $10,034,673 $10,232,695 $10,401,897 $10,560,046 $10,797,270 $11,051,073 $11,348,106 $11,759,926
50% $11,250,257 $11,524,804 $11,722,825 $11,892,028 $12,050,177 $12,287,401 $12,541,204 $12,838,236 $13,250,056
60% $12,740,388 $13,014,934 $13,212,956 $13,382,158 $13,540,307 $13,777,531 $14,031,334 $14,328,366 $14,740,187
70% $14,334,662 $14,609,209 $14,807,231 $14,976,433 $15,134,582 $15,371,806 $15,625,609 $15,922,641 $16,334,462
80% $16,200,483 $16,475,030 $16,673,051 $16,842,254 $17,000,403 $17,237,626 $17,491,430 $17,788,462 $18,200,282
90% $18,788,054 $19,062,601 $19,260,622 $19,429,824 $19,587,974 $19,825,197 $20,079,000 $20,376,033 $20,787,853
Company Performance
Sto
ck P
erfo
rman
ce
Percentiles
Key Discussion Points
3.) Is this an appropriate amount of compensation for a CEO performing between the 80th - 90th percentile for company and stock price performance?
1.) Is this to much compensation for a CEO performing between the 10th - 20th percentile for company and stock price performance? 2.) Is this an appropriate amount of
compensation for a CEO performing at the 50th percentile for company and stock price performance?
4.) Is an incremental change in potential TDC of 9.7% (btw the 30th and 70th percentile for company performance only) enough incentive to drive executive behaviors on company performance?
5.) Is enough of the TDC package driven by company performance?
6.) Is an incremental change in potential TDC of 67% (btw the 30th and 70th percentile for stock price performance only) an appropriate amount of incentive to drive executive behaviors?
7.) Is an appropriate amount of the TDC package driven by stock price performance?
8.) Is the mix between company and stock price performance appropriate?
9.) Does this compensation program have a true pay-for-performance orientation?
10.) What behaviors does this type of compensation program drive?
35©2007 Pearl Meyer & Partners
Mix of Pay
Stock options are the primary vehicle with the largest potential value based on stock price performance• Stock options make up 4% of the total direct compensation (TDC) value assuming a
10th percentile stock price performance and 62% of the value assuming a 90 th percentile stock price performance
CEO Total Direct Compensation Composition
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
Options
Restricted Stock
STI
Base
Stock & 10th & 10th & 10th & 50th & 50th & 50th & 90th & 90th & 90th & Company 10th 50th 90th 10th 50th 90th 10th 50th 90thPerformance
36©2007 Pearl Meyer & Partners
Incremental Pay & Performance Alignment Analysis
Total potential value of the CEO’s total direct compensation (TDC) and incremental wealth creation for shareholders
• Over a 5 year period:
» Firm A will pay the CEO between $19M to $104M
» In turn, Firm A’s market value will return up to ~$4 billion in incremental market value to shareholders
CEO Total Potential TDC vs. Incremental Market Value over 5 years
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
10th 20th 30th 40th 50th 60th 70th 80th 90th
Co
mp
en
sati
on
Valu
e
($1,000,000,000)
$0
$1,000,000,000
$2,000,000,000
$3,000,000,000
$4,000,000,000
$5,000,000,000
$6,000,000,000
Incre
men
tal
Mark
et
Valu
e
Compensation Incremental Market Value
37©2007 Pearl Meyer & Partners
Findings and Outcomes
Findings:
• STI plan allows for threshold level payouts below last year’s performance achievement level
» Results from using +/-10-15% to set thresholds and maximums
• Minimum orientation of pay programs to company financial performance
» Financial performance metrics used only in STI plan
Outcomes:
• Adjusted STI plan so thresholds and maximums are set more appropriately each year specific to targets for the year
» Eliminates potential for threshold payouts for performance below last year
• Implemented new performance-based LTI plan
» LTI awards now reflect options, time- and performance-based restricted stock
38©2007 Pearl Meyer & Partners
Case Study #2
39©2007 Pearl Meyer & Partners
About Firm B
Information about Firm B:
• Semiconductor Equipment firm with ~ 2,500 employees
• Revenues ~$500M; Market cap ~$800M
• Cyclical industry – 3 year cycles
» 2006 was an outstanding performance year
40©2007 Pearl Meyer & Partners
Compensation Program
Compensation Program for the CEO:
Compensation Firm B - CEO
Base Salary Targeted at the competitive market median
Annual Short-Term Incentive (STI)
Threshold: 0% of salary Target: 70% of salary Maximum: 210% of salary (3 times the target award) Metric: Corp EPS (100%)
Annual Mid-Term Incentive (MTI)
3 year performance-based restricted stock plan Earn more or less than target awards based on performance
achievement Metric: Corp EPS (100%)
Annual Long-Term Incentive (LTI)
Stock Options – time-based vesting
41©2007 Pearl Meyer & Partners
Assumptions
Financial Performance Assumptions:
• Used Firm B’s historical EPS mean (10%) and standard deviation (35%)
• Simulated EPS results for 1 and 3 year periods for the STI and MTI
• Achievement on Corp EPS assumed at the same level for both STI & MTI
Stock Price Performance Assumptions:
• Firm B uses stock price performance for both the MTI and LTI
• Evaluated the following to determine appropriate growth assumptions:
Alternatives Look Back Look Forward Look Around Expected ValueManagement
Outlook
Annualized TSR – Average (Mean)
20% 5% 4% - 5% 7% 10%
Annualized TSR - Standard Deviation
15% 8% 12% - 20% 40% 15%
42©2007 Pearl Meyer & Partners
Base Salary
CEO
Salary - $400,000
5%20%
35%50%
65%80%
95%
5%20%
35%50%
65%80%
95%
$0
$400,000
$800,000
Company Performance
Stock Performance
Base Salary
$400,000-$800,000
$0-$400,000
Base salary is not impacted by company or stock price performance; therefore it is one-dimensional
43©2007 Pearl Meyer & Partners
Total Cash Compensation
CEO
Salary - $400,000
STI:
• Min – 0%
• Target STI – 70%
• Max STI – 210%
5%20%
35%50%
65%80%
95%
5%20%
35%50%
65%80%
95%
$0
$300,000
$600,000
$900,000
$1,200,000
$1,500,000
Company Performance
Stock Performance
Total Cash (Base plus Annual Incentive)
$1,200,000-$1,500,000
$900,000-$1,200,000
$600,000-$900,000
$300,000-$600,000
$0-$300,000
Total cash compensation is impacted by company performance only; therefore the graphic moves from left to right. Potential payout ranges from $400K-$1.2M
44©2007 Pearl Meyer & Partners
Mid-Term Incentive
CEO
Salary - $400,000
STI:
• Min – 0%
• Target STI – 70%
• Max STI – 210%
MTI:
• Min MTI – 0 shares
• Target MTI – 8,000
• Max MTI – 15,000
5%20%
35%50%
65%80%
95%
5%20%
35%50%
65%80%
95%
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Company Performance
Stock Performance
Mid-Term Incentive
$1,000,000-$1,200,000
$800,000-$1,000,000
$600,000-$800,000
$400,000-$600,000
$200,000-$400,000
$0-$200,000
The Mid-Term Incentive plan is impacted by both company and stock price performance; therefore the graphic moves up the center. Potential value ranges from $0-$1.2M
45©2007 Pearl Meyer & Partners
Stock Options
CEO
Salary - $400,000
STI:
• Min – 0%
• Target STI – 70%
• Max STI – 210%
MTI:
• Min MTI – 0 shares
• Target MTI – 8,000
• Max MTI – 15,000
• Options – 45,000
5%20%
35%50%
65%80%
95%
5%20%
35%50%
65%80%
95%
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
Company Performance
Stock Performance
Stock Options
$4,000,000-$5,000,000
$3,000,000-$4,000,000
$2,000,000-$3,000,000
$1,000,000-$2,000,000
$0-$1,000,000
Stock options are impacted by stock price performance only; therefore the graphic moves from right to left. Potential value ranges from $0-$4.5M
46©2007 Pearl Meyer & Partners
Total Direct Compensation
CEO
Salary - $400,000
STI:
• Min – 0%
• Target STI – 70%
• Max STI – 210%
MTI:
• Min MTI – 0 shares
• Target MTI – 8,000
• Max MTI – 15,000
• Options – 45,000
5%20%
35%50%
65%80%
95%
5%
25%
45%
65%
85%
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
Company Performance
Stock Performance
Total Potential TDC
$6,000,000-$7,000,000
$5,000,000-$6,000,000
$4,000,000-$5,000,000
$3,000,000-$4,000,000
$2,000,000-$3,000,000
$1,000,000-$2,000,000
$0-$1,000,000
Total direct compensation is impacted by both company and stock price performance. This program is more equally-oriented towards company and stock price performance
47©2007 Pearl Meyer & Partners
10% 20% 30% 40% 50% 60% 70% 80% 90%
10% $468,267 $536,913 $619,533 $729,065 $834,579 $934,941 $1,114,342 $1,448,356 $1,776,563
20% $1,153,485 $1,222,132 $1,310,160 $1,430,671 $1,546,958 $1,657,252 $1,847,702 $2,195,034 $2,540,716
30% $1,647,576 $1,716,223 $1,808,151 $1,936,578 $2,060,633 $2,178,089 $2,376,506 $2,733,442 $3,091,725
40% $2,069,759 $2,138,406 $2,233,665 $2,368,856 $2,499,550 $2,623,125 $2,828,350 $3,193,492 $3,562,541
50% $2,464,363 $2,533,010 $2,631,383 $2,772,897 $2,909,795 $3,039,090 $3,250,678 $3,623,489 $4,002,602
60% $2,858,967 $2,927,614 $3,029,102 $3,176,937 $3,320,039 $3,455,054 $3,673,005 $4,053,486 $4,442,663
70% $3,281,149 $3,349,796 $3,454,616 $3,609,216 $3,758,956 $3,900,090 $4,124,849 $4,513,536 $4,913,480
80% $3,775,240 $3,843,887 $3,952,607 $4,115,123 $4,272,631 $4,420,927 $4,653,653 $5,051,944 $5,464,488
90% $4,460,459 $4,529,106 $4,643,234 $4,816,728 $4,985,010 $5,143,238 $5,387,014 $5,798,622 $6,228,642
Company Performance
Sto
ck P
erf
orm
an
ce
Percentiles
Key Discussion Points
3.) Is this an appropriate amount of compensation for a CEO performing between the 80th - 90th percentile for company and stock price performance?
1.) Is this to much compensation for a CEO performing between the 10th - 20th percentile for company and stock price performance? 2.) Is this an appropriate amount of
compensation for a CEO performing at the 50th percentile for company and stock price performance?
4.) Is an incremental change in potential TDC of 9.7% (btw the 30th and 70th percentile for company performance only) enough incentive to drive executive behaviors on company performance?
5.) Is enough of the TDC package driven by company performance?
6.) Is an incremental change in potential TDC of 67% (btw the 30th and 70th percentile for stock price performance only) an appropriate amount of incentive to drive executive behaviors?
7.) Is an appropriate amount of the TDC package driven by stock price performance?
8.) Is the mix between company and stock price performance appropriate?
9.) Does this compensation program have a true pay-for-performance orientation?
10.) What behaviors does this type of compensation program drive?
48©2007 Pearl Meyer & Partners
Mix of Pay
Stock options are the primary vehicle with the largest potential value based on stock price performance
• Stock options make up 11% of TDC value assuming a 10th percentile stock price performance and 65% of the value assuming a 90th percentile stock price performance
CEO Total Direct Compensation Composition
15%86% 7%7%
STI: 3%13%8%
15%
65%
70%
Options: 11%
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
10th Percentile 50th Percentile 90th Percentile
Company Financial and Stock Performance Percentile
Com
pens
atio
n
Options
MTI
STI
Base
49©2007 Pearl Meyer & Partners
Incremental Pay & Performance Alignment Analysis
Total potential value of TDC and incremental wealth creation for shareholders
• Over a 7 year period:
» Firm B will pay the CEO between $3.3M to $43.6M
» In turn, Firm B’s market value will return up to ~$1.5 billion in incremental market value to shareholders
CEO Total Potential TDC vs. Incremental Market Value over 7 years
$43,6M
$20.4M
$3.3M
$0.8B
$1.5B
$0.2B-$5,000,000
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$40,000,000
$45,000,000
10thP'tile
20thP'tile
30thP'tile
40thP'tile
50thP'tile
60thP'tile
70thP'tile
80thP'tile
90thP'tile
Co
mp
en
sa
tio
n V
alu
e
($200,000,000)
$80,000,000
$360,000,000
$640,000,000
$920,000,000
$1,200,000,000
$1,480,000,000
$1,760,000,000
$2,040,000,000
$2,320,000,000
$2,600,000,000
Inc
rem
en
tal
Ma
rke
t V
alu
e
Compensation Incremental Market Value
50©2007 Pearl Meyer & Partners
Findings and Outcomes
Findings:
• Executive compensation program aligns with how the program was designed and provides the intended results
» In years when company is not performing – no payouts
» In years when company is performing – target payouts
» In years when company is outperforming – maximum payouts
Outcomes:
• No changes were made to the existing executive compensation program
51©2007 Pearl Meyer & Partners
Conclusion
52©2007 Pearl Meyer & Partners
Conclusion
Solid assessment tools:
• Competitive analysis
• Tally sheets (or some form of)
Comprehensive assessment tools:
• EIA
• Incremental pay & performance alignment analysis
• Competitive analysis
• Tally sheets (or some form of)
53©2007 Pearl Meyer & Partners
Questions
For more information, please contact:
Melissa L. MeansPearl Meyer & Partners
132 Turnpike Road, Suite 300Southborough, MA 01772
(508) [email protected]
OR
Visit our website:www.pearlmeyer.com
Click on Our Knowledge then Presentations and Speeches